All last year, Countrywide Financial Corp. Chief Executive Angelo R. Mozilo insisted that the lender would survive the mortgage crunch.
If he believed what he was saying, he grossly underestimated the market forces that were driving the company either into bankruptcy or, as happened Friday, into the arms of a deep-pocketed suitor: Bank of America Corp.
Instead of listening to Mozilo, investors would have been better off paying attention to the actions of "short sellers" -- traders who were betting heavily that Countrywide wouldn't make it.
First up, there is a cold fact of life for any financial company that has lost investors' confidence: If Wall Street begins to think you're gone, you're gone, because you won't get the funding you need to keep your business going day to day. Or even if you can get it, you won't be able to afford it.
Countrywide, already shut off from the easy Wall Street credit that had fueled its growth during the housing market's boom times, has $15.5 billion in debt maturing this year.
Maybe it could have refinanced those borrowings, but at what cost?
MBIA Inc., the big bond insurance firm that is reeling from losses on mortgage debt it has guaranteed, on Friday sought to bolster its balance sheet by raising $1 billion in capital via the sale of notes.
The investors who bought the notes demanded a whopping 14% annual interest rate on their money, at least through 2013. That is far above the average corporate junk bond yield of 9.11%, according to bond tracker KDP Investment Advisors -- and a sign of how risky MBIA is perceived to be.
Apart from underestimating market concerns about how Countrywide would finance itself, Mozilo apparently didn't foresee how vicious the selling of his stock would become.
Right or wrong, a company's stock price shows investors' second-by-second judgment of how the business is going and what it is worth. In Countrywide's case, the market in the first three days of this week marked down the value of the business by an average of 15% a day. The stock reached an 11-year low of $4.43 at one point on Wednesday.
You can't have too many 15% down days before a company's market value nears zero. That message had to be coming over loud and clear at Countrywide's Calabasas headquarters.
What was driving the selling?
On Tuesday, rumors swept the market that the company was on the verge of a bankruptcy filing. Countrywide issued a statement saying there was "no substance" to the rumors, but that didn't help the stock.
